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The Fed After Ben: Janet Yellen, The Challenge Of Tapering And A Bloated $3.6 Trillion Balance Sheet

The Fed has been the dominant market player since the 2008 financial crisis that brought the global economy to its knees, having taken its balance sheet past $3.6 trillion in its attempts to jumpstart growth. The end of Chairman Ben Bernanke’s tenure marks the moment in which the Fed will have to begin to cut back on its asset purchase programs, or QE, while telegraphing to market participants that it is not tightening monetary policy. A monumental task for Janet Yellen, who will be the first person in history to unwind such extraordinary levels of monetary accommodation.

Janet Yellen (Photo credit: Wikipedia)

Earlier in 2013, Ben Bernanke first informed markets that he foresaw conditions to taper QE, potentially ending the asset purchase program in mid-2014 as the labor market strengthened and the economic recovery continued. What ensued was sheer panic, as financial conditions tightened dramatically, particularly in the housing market where mortgage rates jumped, forcing the Fed to backtrack to assure investors it wasn’t letting go. This will be the Fed’s challenge in 2014: figuring out how to taper without spooking the market.

Yellen has already made it clear that her intention is to strengthen the Fed’s communication through its forward guidance. According to BarclaysBarclays’ Peter Newland, the idea is how to manage monetary policy once asset purchases, which the market has latched on to, have concluded. The focus will be on developing a forward guidance that will keep the front end of the yield curve anchored, Nomura’s fixed income research team explains, trying to differentiate tapering from tightening.

The latest round of FOMC minutes revealed Fed participants struggling with QE, weighing different options to taper as markets become frothy. Both Bernanke and Yellen have spoken of lowering the unemployment rate threshold, currently at 6.5%, but the consensus seems to be that the FOMC prefers “qualitative” to “quantitative” means of communication, in order to avoid pushing itself into a corner.

The economy is expected to accelerate next year, as the fiscal drag caused by continuous political battles in Washington dissipates, and as businesses and households see their balance sheets repaired in the aftermath of the crisis. Nomura expects 2.7% growth in the first half of 2014, and 3% for H2 and following year. Home prices should rise between 4% and 5% in 2014, and then 3% 4% onward, while the unemployment rate should slide to 7% by the end of next year, they explained.

The labor market will play a major role in the Fed’s timing. Tapering is set to happen, indeed Barclays’ Newman expects QE to be concluded in the second half of 2014, yet the Fed needs to see substantial improvement in labor markets that is self sustaining. The summer tightening of financial conditions put a face to the downside risks to the Fed’s outlook, as higher rates will harm sectors like housing and autos which have carried the recovery, as shares in KB Home, Toll Brothers, GM, and Ford show. The Fed will keep a watchful eye on the unemployment rate, but will also be looking at the participation rate in order to gauge how much slack remains in labor markets. Barclays’ research suggests the unemployment rate is a pretty good measure of the labor market, while Nomura notes the job market will begin to tighten, as they expect non-farm payrolls to hit a rate of 205,000 per month by the end of next year.

Under Chairman Bernanke, the Fed has opened up to an unprecedented degree, giving detailed reports of its decisions. This policy has acted as a double-edged sword, giving quantitative easing a lot of power as the market anticipated the Fed’s flood of cheap money. Yet it has also had the unintended consequence of tying the market’s expectation of Fed tightening to the pace of QE. A move to more “qualitative” thresholds to determine the path of monetary policy should give the 2015 Fed greater control over market expectations. According to Nomura, the first increase in the Federal Funds rate should come in early 2016.

The stage is set. Market participants are already anticipating the end of QE, and it is all but confirmed that Janet Yellen will be in charge to supervise the beginning of the end of the post-financial crisis Fed. Bernanke has repeated constantly that the FOMC has the tools and expertise to manage an exit strategy, yet this has never been attempted before. Bernanke’s own first steps were met with wild swings in interest rates that spooked the Fed. By offsetting the taper with stronger forward guidance, the Yellen Fed will begin to chart its own course.

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There will be no taper in December, or early next year. The Fed has painted itself into a corner. However, if the Fed feels that “saving face” is important and lives up to their taper promise, the reduction will be short-lived. Then, when the Fed comes back with an increase of MBS and Treasury purchases that equals or surpasses the current 85 billion monthly, that is when the world-wide equity and bond markets are going to say “wait a minute… we thought you were in a recovery”, and thereafter the free fall will begin.

What will happen if you keep printing 68 Billion a month to buy worthless mortgage backed securities? Pretty soon you will be able to use it as toilet paper? Yes? No? Why doesn’t this administration know that? Remember 16% inflation under the other Democrat (Carter) Get ready folks, these new know it alls, are going down the same path/ Vote them OUT of Office, or ????

Maybe they do know this! They’ve been pushing for a single North American currency, the Amero, for some time. There’s no better way to do this by wiping out the value of the dollar. Just look at history.

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Remember when the fed embarked on this massive money printing? (Yeah, QE sounds _soooo_ much more sophisticated.) In response to widespread criticism they said, (sic) no problem, we can back out of this quickly should the need arise. So back out of it already.

Does _anyone_ consider the Fed’s activities of the last few years successful? Who has benefited?

Bad news for the Banks and Teflon Don Jamie Dimon, War Hawks and the corrupt lawmakers who made deals with Contractors. Just think Americans approved the wasted 3 Trillion spend in Iraq with nothing to show for it and now demand it be fixed. Much like a family spending overboard on Black Friday and then saying in January who do we blame for the large bill. As the Journalist do their best to spin any thing negative the US is collecting fines before the Big Hit of Libor. So far JP Morgan has spent close to 1/2 Trillion dollars in settlements and legal fees and still more to come. Janet Yellen testified in 2004 the direction of spending the US was taking would lead to a Recession as the GodFather of the Fed Alan Greenspan said things were great. Americans even watched Treasury Secretary Paul O’Neill in 2002 warned the US would have problems with the spending policies and lead to a Recession but O’Neill was quickly fired by the Bush Administration. Americans heard the warnings but trusted the Decider President Bush and Alan Greenspan. Like we see in life the Mother has to fix all the problems caused by Dad.

Finance to an average investor, looks like the queasy nurse holding the deadly point. Yeah Agust, that means you. Finance has fed us full of bullshit. We know it & we know why. Because when we stop spending we all go bye bye.

There was a time when most people would be either disappointed or disgusted with finance. But at this point we are all in the same sinking boat.

Why does this have to happen?

Because when Hitler accomplished the Holocaust, he did so by keeping Germans occupied with frivolous activity. We, are wholly occupied with everything that will maintain our steady decline. We are being played so much so that, look, here comes the shot. We are a wonder of frivolity.

We know everything that does not matter or leads us astray. We are all idiots.

We know nothing of the thief who ran off with all of the assets.

So long as we continue to know nothing about the money that governments spend, we will decline. Here we are where the medicine is going to kill us.

Seems like we know that the guys fighting hungry lions are us & we haven’t got a chance. You can’t tell people to stop buying the bullshit Nazi scheme.

Panic. This will be fun. Stop spending & watch it all collapse.

The only way to financial stability is the people knowing what governments are spending money on & stopping it. There is the medicine that will not cause humankind’s extinction. I keep telling people that this is on people to fix. We can’t keep living like Germans in WWII. We have to actually find out what is going on & cease spending. Until such time, we lose the blood from our jugular.

There isn’t anyone willing to step up & tell us that we in fact caused this by buying into a sick & sad system of frivolity.

Systemic financial breakdown baby. Somebody call Led Zeppelin & have them sing to us as the ship goes down in flames. Because let’s face it, it is easier to blame others, than to see ourselves as the ones responsible to clean up this money killing insanely far gone nightmare that we call our governments.

Fontevecchia, I am surprised at the lack of analysis in your article. Yellin will “unwind” four trillion dollars or so you say. What does that mean? First, somehow those trillions got into stock markets all around the world instead of creating jobs in the USA. But that does not interest you. Secondly, how can the taxpayers service that debt when interest rates go up? For what reason will all home values in the usa go up 5% next year? I doubt that will happen in Detroit, just sayin’. Did someone tell Mr. Fontevecchia to go produce an article saying nothing except that everything will be fine with our latest miracle Jew heading fed? If so, well done.

Did you even read the article? At what point did you find a value judgment regarding the efficiency of the Fed’s monetary policy? I think you are so taken by your anger, as your ridiculous anti-semitism reveals, that you just want to rant somewhere. And on home prices, the areas that were hit the hardest by the crisis, like Las Vegas and Phoenix, were the ones experiencing the fastest price growth this year. Next time, do yourself a favor and use your brain before commenting.

Augustino Why cant they appoint a Scotsman to run the Fed for a change? I hear Scotsman are FRUGAL! Unlike these Jews they keep annointing…errr appointing I meant, who seem to always be incredible SPENDTHRIFTS Maybe this was he point Csherman was making? Or am I demonstrating Anti Celticism here? : )

I am sure the Powerful are glad they have you to protect them from the Equal Employment Commission. I have so many questions. If banks aren’t lending out money, how come they are making record profits? Will housing prices go up 5% next year because of inflation from that 4 trillion leaking out? If so, why not 10%?… Telling people they “aren’t using their brain” is why bubbles are allowed to happen, why financial types can rip off Americans. It is easy to say it is all too hard for us normal people to understand.

So, the Fed plans to cut back on it’s asset purchase program while, at the same time telegraphing market participants that it’s not tightening monetary policy. How is that possible?.

This sounds like double talk. Does the Fed really think that us little people are that stupid we can’t see through this nonsense? To bad that the Fed doesn’t show the same concern for middle class taxpayers and savers as they do for their very wealthy friends.

The Fed’s misguided monetary policy over the past 5-years has done a lot of damage to the lives of many average Americans. For 5-years now, and counting, they’ve been screwing us over big time. When will this finally stop — when we have another great depression?

Don’t expect tapering any time soon. There are too many starkly negative indicators such as the continuing decline in the employment participation rate (now at the 1979 level) and even more worrisome, the severe drop in the M1 multiplier ratio (which died after the 2008 recession began and has yet to get back to pre-recession levels). Yellen and Co. have already indicated in the October 29-30 minutes their concern over the labor market and also that the size of the Fed’s balance sheet is moderate when compared with other leading central banks (ECB, BOJ, BOE).

Despite what some ill-informed observers might be saying, there has been no inflationary impact from QE (this is also true with the BOJ and “Abe-nomics”) as there is considerable slack in the economy. Besides, Fed purchasing of bonds amounts to an asset swap (as they credit the banks’ reserves, which are then invested in equities and other assets) and no net increase of financial assets in the private sector. Is it working? Not really – if by “working”, the economic situation is improving in terms of unemployment and GDP growth (both of which are improving at a glacial pace now, but could easily reverse if more cuts in net federal spending take place).

Analysts are prone to labeling every upward movement in financial markets a bubble these days (we have all heard enough about the bond market bubble, the stock market bubble, the tech bubble and the Bitcoin bubble, haven’t we?). Meanwhile, rumors are doing the rounds that the Chinese and European economies may be slowing down.http://bit.ly/1bK1oiq